Health insurer Humana, which is being acquired by competitor Aetna, posted a year-over-year increase in its second-quarter profit. But that did little to suppress investor disappointment, as hospital and medical claims were again higher than expected.
Humana's overall medical-loss ratio (MLR) in the second quarter was 85.2% compared with 83.1% in the same period last year, the company said Wednesday. The MLR indicates how much of Humana's premium revenue collected from members was spent on medical care.
Medical costs were bloated across each of Humana's segments. The MLR for Humana's Medicare Advantage and individual plans was 87.1%, or 1.9 percentage points higher year over year. The MLR for Humana's employer plans increased 2.5 percentage points to 81.4%. Those figures mirror Humana's first quarter this year, when higher-than-predicted medical claims sent its and other insurance companies' stocks into a tailspin.
Medicare represents 76% of Humana's total revenue. Humana admitted it made mistakes in the pricing of its 2015 Medicare Advantage plans and anticipated hospital admissions would decrease. Hospitalizations are still lower year over year, but they have not declined as quickly as executives thought.
However, “Humana believes it has appropriately reflected recent medical cost experience in its plan designs for 2016 submitted to CMS,” the company said.
Humana's second-quarter profit jumped 25% to $431 million, and revenue increased 12% to $13.7 billion. The company reaffirmed its adjusted earnings per share of $7.75 for the full year, but that figure was cut from the original $8.50 to $9 outlook once Humana announced its deal with Aetna.
Aetna executives haven't shown buyer's remorse, saying Humana's issues were known and will be rectified by 2016. “We devoted significant time to examining and evaluating the risks of Humana's business during our due diligence process,” Aetna Chief Financial Officer Shawn Guertin said this month.
The $37 billion deal is expected to close later next year, pending state and federal antitrust review and other approvals.
No update was given on a federal probe examining Humana's Medicare risk-adjustment practices. The U.S. Justice Department has asked for information about how Humana calculates risk scores for its 3.2 million Medicare members. Allegations have accused insurers of inflating risk scores to obtain higher payments from the government.
“We continue to cooperate with and voluntarily respond to the information requests from the Department of Justice and the U.S. Attorney's Office,” Humana said in a filing with the Securities and Exchange Commission.